Z00_REND1011_11_SE_MOD4 PP3.

QXD

2/21/11

12:49 PM

Page M4-1

MODULE

4
Game Theory

LEARNING OBJECTIVES
After completing this supplement, students will be able to:
1. Understand the principles of zero-sum, two-person
games.
2. Analyze pure strategy games and use dominance to
reduce the size of a game.
3. Solve mixed strategy games when there is no saddle
point.

SUPPLEMENT OUTLINE
M4.1
M4.2

Introduction
Language of Games

M4.3
M4.4
M4.5
M4.6

The Minimax Criterion

Pure Strategy Games
Mixed Strategy Games
Dominance

Summary Glossary Solved Problems Self-Test Discussion Questions and Problems Bibliography
Appendix M4.1: Game Theory with QM for Windows

M4-1

Z00_REND1011_11_SE_MOD4 PP3.QXD

M4-2

M4.1

12:49 PM

Page M4-2

MODULE 4 GAME THEORY

Introduction

In a zero-sum game, what is

gained by one player is lost by
the other.

M4.2

2/21/11

As discussed in Chapter 1, competition can be an important decision-making factor. The strategies taken by other organizations or individuals can dramatically affect the outcome of our
decisions. In the automobile industry, for example, the strategies of competitors to introduce certain models with certain features can dramatically affect the profitability of other carmakers.
Today, business cannot make important decisions without considering what other organizations
or individuals are doing or might do.
Game theory is one way to consider the impact of the strategies of others on our strategies
and outcomes. A game is a contest involving two or more decision makers, each of whom wants
to win. Game theory is the study of how optimal strategies are formulated in conflict.
The study of game theory dates back to 1944, when John von Neumann and Oscar Morgenstern published their classic book, Theory of Games and Economic Behavior.1 Since then, game
theory has been used by army generals to plan war strategies, by union negotiators and managers
in collective bargaining, and by businesses of all types to determine the best strategies given a
competitive business environment.
Game theory continues to be important today. In 1994, John Harsanui, John Nash, and
Reinhard Selten jointly received the Nobel Prize in Economics from the Royal Swedish
Academy of Sciences.2 In their classic work, these individuals developed the notion of
noncooperative game theory. After the work of John von Neumann, Nash developed the concepts of the Nash equilibrium and the Nash bargaining problem, which are the cornerstones of
modern game theory.
Game models are classified by the number of players, the sum of all payoffs, and the number
of strategies employed. Due to the mathematical complexity of game theory, we limit the analysis in this module to games that are two person and zero sum. A two-person game is one in
which only two parties can playas in the case of a union and a company in a bargaining
session. For simplicity, X and Y represent the two game players. Zero sum means that the sum of
losses for one player must equal the sum of gains for the other player. Thus, if X wins 20 points
or dollars, Y loses 20 points or dollars. With any zero-sum game, the sum of the gains for one
player is always equal to the sum of the losses for the other player. When you sum the gains and
losses for both players, the result is zerohence the name zero-sum games.

Language of Games
To introduce the notation used in game theory, let us consider a simple game. Suppose there are
only two lighting fixture stores, X and Y, in Urbana, Illinois. (This is called a duopoly.) The
respective market shares have been stable up until now, but the situation may change. The
daughter of the owner of store X has just completed her MBA and has developed two distinct
advertising strategies, one using radio spots and the other newspaper ads. Upon hearing this, the
owner of store Y also proceeds to prepare radio and newspaper ads.
The 2 * 2 payoff matrix in Table M4.1 shows what will happen to current market shares if
both stores begin advertising. By convention, payoffs are shown only for the first game player, X
in this case. Ys payoffs will just be the negative of each number. For this game, there are only
two strategies being used by each player. If store Y had a third strategy, we would be dealing
with a 2 * 3 payoff matrix.

1J. von Neumann and O. Morgenstern. Theory of Games and Economic Behavior. Princeton, NJ: Princeton University
Press, 1944.
2Rita Koselka. The Games Businesses Play, Forbes (November 7, 1994): 12.

Z00_REND1011_11_SE_MOD4 PP3.QXD

2/21/11

12:49 PM

Page M4-3

M4.3

TABLE M4.1
Store Xs Payoff Matrix

THE MINIMAX CRITERION

M4-3

GAME PLAYER Ys STRATEGIES

GAME
PLAYER XS
STRATEGIES

Y1
(Use radio)

Y2
(Use newspaper)

X1
(Use radio)

X2
(Use newspaper)

-2

A positive number in Table M4.1 means that X wins and Y loses. A negative number means
that Y wins and X loses. It is obvious from the table that the game favors competitor X, since all
values are positive except one. If the game had favored player Y, the values in the table would
have been negative. In other words, the game in Table M4.1 is biased against Y. However, since
Y must play the game, he or she will play to minimize total losses. To do this, Player Y would
use the minimax criterion, our next topic.
Game Outcomes

M4.3

STORE Xs
STRATEGY

STORE Ys
STRATEGY

OUTCOME (% CHANGE
IN MARKET SHARE)

X1 (use radio)

Y1 (use radio)

X wins 3
and Y loses 3

X1 (use radio)

Y2 (use newspaper)

X wins 5
and Y loses 5

X2 (use newspaper)

Y1 (use radio)

X wins 1
and Y loses 1

X2 (use newspaper)

Y2 (use newspaper)

X loses 2
and Y wins 2

The Minimax Criterion

A player using the minimax

criterion will select the strategy
that minimizes the maximum
possible loss.

The upper value of the game is

equal to the minimum of the
maximum values in the columns.

The lower value of the game is

equal to the maximum of the
minimum values in the rows.

For two-person, zero-sum games, there is a logical approach to finding the solution: In a zerosum game, each person should choose the strategy that minimizes the maximum loss, called the
minimax criterion. This is identical to maximizing ones minimum gains, so for one player, this
could be called the maximin criterion.
Let us use the example in Table M4.1 to illustrate the minimax criterion. This is a twoperson zero-sum game with the strategies for player Y given as the columns of the table. The
values are gains for player X and losses for player Y. Player Y is looking at a maximum loss of 3
if strategy Y1 is selected and a maximum loss of 5 if strategy Y2 is selected. Thus, Player Y should
select strategy Y1, which results in a maximum loss of 3 (the minimum of the maximum possible
losses). This is called the upper value of the game. Table M4.2 illustrates this minimax
approach.
In considering the maximin strategy for player X (whose strategies correspond to the rows
of the table), let us look at the minimum payoff for each row. The payoffs are +3 for strategy X1
and -2 for strategy X2. The maximum of these minimums is +3, which means strategy X1, will
be selected. This value 1+32 is called the lower value of the game.
If the upper and lower values of a game are the same, this number is called the value of
the game, and an equilibrium or saddle point condition exists. For the game presented in

Z00_REND1011_11_SE_MOD4 PP3.QXD

M4-4

2/21/11

12:49 PM

Page M4-4

MODULE 4 GAME THEORY

TABLE M4.2
Minimax Solution

SADDLE POINT
Y1

Y2

X1

X2

-2

Maximum

Minimum
3

Maximum of minimums

!2

Minimum of maximums
An equilibrium or saddle point
condition exists if the upper
value of the game is equal to the
lower value of the game. This is
called the value of the game.

M4.4

Table M4.2, the value of the game is 3 because this is the value for both the upper and lower
values. The value of the game is the average or expected game outcome if the game is played an
infinite number of times.
In implementing the minimax strategy, player Y will find the maximum value in each column and select the minimum of these maximums. In implementing the maximin strategy, player
X will find the minimum value in each row and select the maximum of these minimums. When
a saddle point is present, this approach will result in pure strategies for each player. Otherwise,
the solution to the game will involve mixed strategies. These concepts are discussed in the following sections.

Pure Strategy Games

A pure strategy exists whenever a

saddle point is present.

When a saddle point is present, the strategy each player should follow will always be the same
regardless of the other players strategy. This is called a pure strategy. A saddle point is a situation in which both players are facing pure strategies.
Using minimax criterion, we saw that the game in Table M4.2 had a saddle point and thus is
an example of a pure strategy game. It is beneficial for player X and for player Y to always
choose one strategy. Simple logic would lead us to this same conclusion. Player X will always
select X1, since the payoffs for X1 are better than the payoffs for X2, regardless of what player Y
does. Knowing that player X will select X1, player Y will always select strategy Y1 and only lose
3 rather than 5. Note that the saddle point in this example, 3, is the largest number in its column
and the smallest number in its row. This is true of all saddle points.
Another example of a pure strategy game is shown in Table M4.3. Notice that the value 6 is
the lowest number in its row and the highest number in its column. Thus, it is a saddle point and
indicates that strategy X1 will be selected by player X and strategy Y2 will be selected by player Y.
The value of this game is 6.

TABLE M4.3
Example of a Pure
Strategy Game

PLAYER Ys STRATEGIES

PLAYER Xs
STRATEGIES

Minimum
row number
T

Y1

Y2

X1

10

X2

- 12

- 12

10

Maximum column number :

Z00_REND1011_11_SE_MOD4 PP3.QXD

2/21/11

12:49 PM

Page M4-5

M4.5

IN ACTION

M4-5

Game Theory in the Brewing Business

ompanies that understand the principles and importance of

game theory can often select the best competitive strategies.
Companies that dont can face financial loss or even bankruptcy.
The successful and unsuccessful selection of competitive gaming
strategies can be seen in most industries, including the brewing
industry.
In the 1970s, Schlitz was the second-largest brewer in the
United States. With its slogan the beer that made Milwaukee
famous, Schlitz was chasing after the leader in beer sales,
Anheuser-Busch, maker of Budweiser. Schlitz could either keep its
current production output or attempt to produce more beer to
compete with Anheuser-Busch. It decided to get more beer to the
market in a shorter amount of time. In order to accomplish this,
Schlitz selected a strategy of distributing immature beer. The
result was cloudy beer that often contained a slimy suspension.
The beer and Schlitzs market share and profitability went down
the drain. Anheuser-Busch, Miller, and Coors became the market
leaders.

M4.5

MIXED STRATEGY GAMES

Similarly, when Miller first decided to market Miller Lite, with

the slogan tastes greatless filling, Anheuser-Busch had two
possible gaming strategies: to develop its own low-calorie beer or
to criticize Miller in its advertising for producing a watered-down
beer. The strategy it selected was to criticize Miller in its advertising. The strategy didnt work, Miller gained significant market
share, and Anheuser-Busch was forced to come out with its own
low-calorie beerBud Light.
Today, Anheuser-Busch, Miller, Coors, and other large beer
manufacturers face new games and new competitors that produce micro-brews, dry beer, and ice beer. Although it is too early
to tell what the large beer makers will do and how successful
their strategies will be, it appears that their strategy will be to duplicate what these smaller brewers are doing. What is clear, however, is that a knowledge of the fundamentals of game theory can
make a big difference.
Source: Philip Van Munching. American Brewing, Unreal, The Economist
(September, 4, 1977): 24.

Mixed Strategy Games

In a mixed strategy game,

each player should optimize
the expected gain.

When there is no saddle point, players will play each strategy for a certain percentage of the
time. This is called a mixed strategy game. The most common way to solve a mixed strategy
game is to use the expected gain or loss approach. The goal of this approach is for a player to
play each strategy a particular percentage of the time so that the expected value of the game does
not depend upon what the opponent does. This will only occur if the expected value of each
strategy is the same.
Consider the game shown in Table M4.4. There is no saddle point, so this will be a mixed
strategy game. Player Y must determine the percentage of the time to play strategy Y1 and the
percentage of the time to play strategy Y2. Let P be the percentage of time that player Y chooses
strategy Y1 and 1 - P be the percentage of time that player Y chooses strategy Y2. We must
weight the payoffs by these percentages to compute the expected gain for each of the different
strategies that player X may choose.
For example, if player X chooses strategy X1, then P percent of the time the payoff for Y
will be 4, and 1 - P percent of the time the payoff will be 2, as shown in Table M4.5. Similarly,
if player X chooses strategy X2, then P percent of the time the payoff for Y will be 1, and 1 - P
percent of the time the payoff will be 10. If these expected values are the same,

TABLE M4.4
Game Table for Mixed
Strategy Game

PLAYER Ys STRATEGIES
Y1
PLAYER Xs
STRATEGIES

Y2

X1

X2

10

Z00_REND1011_11_SE_MOD4 PP3.QXD

M4-6

2/21/11

12:50 PM

Page M4-6

MODULE 4 GAME THEORY

TABLE M4.5
Game Table for Mixed
Strategy Game with
Percentages (P, Q)
Shown

X1

X2

1 - Q

Expected gain

Y1

Y2

1 - P

Expected gain

4P " 2(1 ! P)

10

1P " 10(1 ! P)

4Q " 1(1 ! Q)

2Q " 10(1 ! Q)

then the expected value for player Y will not depend on the strategy chosen by X. Therefore, to
solve this, we set these two expected values equal, as follows:
4P + 211 - P2 = 1P + 1011 - P2
Solving this for P, we have
P = 8>11

and

1 - P = 1 - 8>11 = 3>11

Thus, 8>11 and 3>11 indicate how often player Y will choose strategies Y1 and Y2 respectively. The
expected value computed with these percentages is
1P + 1011 - P2 = 118>112 + 1013>112 =

38

>11 = 3.46

Performing a similar analysis for player X, we let Q be the percentage of the time that strategy X1 is played and 1 - Q be the percentage of the time that strategy X2 is played. Using these,
we compute the expected gain shown in Table M4.5. We set these equal, as follows:
4Q + 111 - Q2 = 2Q + 1011 - Q2
Solving for Q, we get
Q = 9>11

and

1 - Q = 2>11

Thus, 9>11 and 2>11 indicate how often player X will choose strategies X1 and X2 respectively. The
expected gains with these probabilities will also be 38>11, or 3.46.

IN ACTION

Using Game Theory to Shape Strategy at General Motors

ame theory often assumes that one player or company must

lose for another to win. In the auto industry, car companies typically compete by offering rebates and price cuts. This allows one
company to gain market share at the expense of other car companies. Although this winlose strategy works in the short term,
competitors quickly follow the same strategy. The result is lower
margins and profitability. Indeed, many customers wait until a rebate or price cut is offered before buying a new car. The shortterm winlose strategy turns into a long-term loselose result.
By changing the game itself, it is possible to find strategies
that can benefit all competitors. This was the case when General

Motors (GM) developed a new credit card that allowed people to

apply 5% of their purchases to a new GM vehicle, up to $500 per
year, with a maximum of $3,500. The credit card program replaced other incentive programs offered by GM. Changing the
game helped bring profitability back to GM. In addition, it also
helped other car manufacturers who no longer had to compete
on price cuts and rebates. In this case, the new game resulted in
a winwin situation with GM. Prices, margins, and profitability increased for GM and for some of its competitors.
Source: Adam Brandenburger, et al. The Right Game: Use Game Theory to
Shape Strategy, Harvard Business Renew (July-August 1995): 57.

Z00_REND1011_11_SE_MOD4 PP3.QXD

2/21/11

12:50 PM

Page M4-7

SUMMARY

M4.6

M4-7

Dominance
The principle of dominance can be used to reduce the size of games by eliminating strategies
that would never be played. A strategy for a player is said to be dominated if the player can always do as well or better playing another strategy. Any dominated strategy can be eliminated
from the game. In other words, a strategy can be eliminated if all its games outcomes are the
same or worse than the corresponding game outcomes of another strategy.
Using the principle of dominance, we reduce the size of the following game:
Y1

Y2

X1

X2

20

X3

In this game, X3 will never be played because X can always do better by playing X1 or X2. The
new game is
Y1

Y2

X1

X2

20

Here is another example:

Y1

Y2

Y3

Y4

X1

-5

-3

X2

-2

-20

In this game, Y would never play Y2 and Y3 because Y could always do better playing Y1 or Y4.
The new game is
Y1

Y4

X1

-5

-3

X2

-2

- 20

Summary
Game theory is the study of how optimal strategies are formulated in conflict. Because of the mathematical complexities of
game theory, this module is limited to two-person and zerosum games. A two-person game allows only two people or two
groups to be involved in the game. Zero sum means that the
sum of the losses for one player must equal the sum of the
gains for the other player. The overall sum of the losses and
gains for both players, in other words, must be zero.

Depending on the actual payoffs in the game and the size

of the game, a number of solution techniques can be used. In a
pure strategy game, strategies for the players can be obtained
without making any calculations. When there is not a pure
strategy, also called a saddle point, for both players, it is necessary to use other techniques, such as the mixed strategy
approach, dominance, and a computer solution for games
larger than 2 * 2.

Z00_REND1011_11_SE_MOD4 PP3.QXD

M4-8

2/21/11

12:50 PM

Page M4-8

MODULE 4 GAME THEORY

Glossary
Dominance A procedure that is used to reduce the size of
the game.
Minimax Criterion A criterion that minimizes ones maximum losses. This is another way of solving a pure strategy
game.
Mixed Strategy Game A game in which the optimal
strategy for both players involves playing more than one
strategy over time. Each strategy is played a given percentage of the time.

Pure Strategy A game in which both players will always

play just one strategy.
Saddle Point Game A game that has a pure strategy.
Two-Person Game A game that has only two players.
Value of the Game The expected winnings of the game if
the game is played a large number of times.
Zero-Sum Game A game in which the losses for one player
equal the gains for the other player.

Solved Problems
Solved Problem M4-1
George Massic (player X) faces the following game. Using dominance, reduce the size of the game, if
possible.
Y1

Y2

X1

X2

20

23

X3

15

11

Solution
After carefully analyzing the game, George realizes that he will never play strategy X1 . The best outcome for this strategy (6) is worse than the worst outcome for the other two strategies. In addition,
George would never play strategy X3, for the same reason. Thus, George will always play strategy X2.
Given this situation, player Y would always play strategy Y1 to minimize her losses. This is a pure strategy game with George playing X2 and person Y playing strategy Y1. The value of the game for this problem is the outcome of these two strategies, which is 20.

Solved Problem M4-2

Using the solution procedure for a mixed strategy game, solve the following game:
Y1

Y2

X1

X2

10

Solution
This game can be solved by setting up the mixed strategy table and developing the appropriate equations:
Y1

Y2

1 - P

Expected gain

X1

4P " 2(1 ! P)

X1

1 - Q

10

0P " 10(1 ! P)

4Q " 0(1 ! Q)

2Q " 10(1 ! Q)

Expected gain

Z00_REND1011_11_SE_MOD4 PP3.QXD

2/21/11

12:50 PM

Page M4-9

DISCUSSION QUESTIONS AND PROBLEMS

M4-9

The equations for Q are

The equations for P are

4Q + 011 - Q2 = 2Q + 1011 - Q2
4Q = 2Q + 10 - 10Q
12Q = 10 or Q = 10>12 and 1 - Q = 2>12
4P + 211 - P2 = 0P + 1011 - P2
4P + 2 - 2P = 10 - 10P
12P = 8 or P = 8>12 and 1 - P = 4>12

Self-Test
!

!
!

Before taking the self-test, refer back to the learning objectives at the beginning of the supplement and the glossary at the end
of the supplement.
Use the key at the back of the book to correct your answers.
Restudy pages that correspond to any questions that you answered incorrectly or material you feel uncertain about.

1. In a two-person, zero-sum game,

a. each person has two strategies.
b. whatever is gained by one person is lost by the other.
c. all payoffs are zero.
d. a saddle point always exists.
2. A saddle point exists if
a. the largest payoff in a column is also the smallest
payoff in its row.
b. the smallest payoff in a column is also the largest
payoff in its row.
c. there are only two strategies for each player.
d. there is a dominated strategy in the game.
3. If the upper and lower values of the game are the same,
a. there is no solution to the game.
b. there is a mixed solution to the game.
c. a saddle point exists.
d. there is a dominated strategy in the game.
4. In a mixed strategy game,
a. each player will always play just one strategy.
b. there is no saddle point.
c. each player will try to maximize the maximum of all
possible payoffs.
d. a player will play each of two strategies exactly 50%
of the time.

5. In a two-person zero-sum game, it is determined that

strategy X1 dominates strategy X2. This means
a. strategy X1 will never be chosen.
b. the payoffs for strategy X1 will be greater than or equal
to the payoffs for X2.
c. a saddle point exists in the game.
d. a mixed strategy must be used.
6. In a pure strategy game,
a. each player will randomly choose the strategy to be
used.
b. each player will always select the same strategy, regard
less of what the other person does.
c. there will never be a saddle point.
d. the value of the game must be computed using probabilities.
7. The solution to a mixed strategy game is based on the
assumption that
a. each player wishes to maximize the long-run average
payoff.
b. both players can be winners with no one experiencing
any loss.
c. players act irrationally.
d. there is sometimes a better solution than a saddle point
solution.

Discussion Questions and Problems

Discussion Questions
M4-1 What is a two-person, zero-sum game?
M4-2 How do you compute the value of the game?
M4-3 What is a pure strategy?

M4-4 Explain the concept of dominance. How is it used?

M4-5 How is a saddle point found in a game?
M4-6 How do you determine whether a game is a pure
strategy game or a mixed strategy game?
M4-7 What is a mixed game, and how is it solved?

Z00_REND1011_11_SE_MOD4 PP3.QXD

M4-10

2/21/11

12:50 PM

Page M4-10

MODULE 4 GAME THEORY

Problems*

M4-15 Shoe Town and Fancy Foot are both vying for more
share of the market. If Shoe Town does no advertising, it will not lose any share of the market if Fancy
Foot does nothing. It will lose 2% of the market if
Fancy Foot invests $10,000 in advertising, and it
will lose 5% of the market if Fancy Foot invests
$20,000 in advertising. On the other hand, if Shoe
Town invests $15,000 in advertising, it will gain 3%
of the market if Fancy Foot does nothing; it will gain
1% of the market if Fancy Foot invests $10,000 in
advertising; and it will lose 1% if Fancy Foot invests
$20,000 in advertising.
(a) Develop a payoff table for this problem.
(b) Determine the various strategies using the
computer.
(c) How would you determine the value of the
game?
M4-16 Assume that a 1% increase in the market means a
profit of $1,000. Resolve Problem M4-15, using
monetary value instead of market share.
M4-17 Solve for the optimal strategies and the value of the
following game:

M4-8 Determine the strategies for X and Y, given the

following game. What is the value of the game?
Y1

Y2

X1

-4

X2

10

M4-9 What is the value of the following game and the

strategies for A and B?
B1

B2

A1

19

20

A2

-4

M4-10 Determine each players strategy and the value of

the game, given the following table:
Y1

Y2

X1

86

42

X2

36

106
A

M4-11 What is the value of the following game?

S1

S2

R1

21

116

R2

89

M4-12 Player A has a $1 bill and a $20 bill, and player B has
a $5 bill and a $10 bill. Each player will select a bill
from the other player without knowing what bill the
other player selected. If the total of the bills selected is
odd, player A gets both of the two bills that were selected, but if the total is even, player B gets both bills.
(a) Develop a payoff table for this game. (Place the
sum of both bills in each cell.)
(b) What are the best strategies for each player?
(c) What is the value of the game? Which player
would you like to be?
M4-13 Resolve Problem M4-12. If the total of the bills is
even, player A gets both of the bills selected, but if
the total is odd, player B gets both bills.
M4-14 Solve the following game:
Y1

Y2

X1

-5

- 10

X2

12

X3

12

X4

- 40

-5

*Note:

STRATEGY
B1

STRATEGY
B2

STRATEGY
B3

STRATEGY A1

-10

15

STRATEGY A2

20

-20

STRATEGY A3

STRATEGY A4

-13

-10

44

STRATEGY A5

-30

45

STRATEGY A6

16

-20

M4-18 For the following two-person, zero-sum game, are

there any dominated strategies? If so, eliminate any
dominated strategy and find the value of the game.
PLAYER Ys STRATEGIES
Y1

Y2

Y3

PLAYER Xs

X1

10

STRATEGIES

X2

X3

M4-19 Refer to Problem M4-8. There is a saddle point in this

game, making it a pure strategy game. Ignore this and
solve it as a mixed strategy game. What special condition in the solution indicates that this should not
have been solved as a mixed strategy game?

means the problem may be solved with QM for Windows.

Z00_REND1011_11_SE_MOD4 PP3.QXD

2/21/11

12:50 PM

Page M4-11

BIBLIOGRAPHY

are critical to their success. Petroleum Research,

with the help of an advertising firm, has developed
15 possible strategies. Extraction International has
developed 5 possible advertising strategies. The economic outcome in millions of dollars is shown in the
following table. What strategy do you recommend
for Petroleum Research? How much money can it
expect from its approach?

M4-20 Petroleum Research, Inc. (A), and Extraction International, Inc. (B), have each developed a new extraction procedure that will remove metal and other
contaminants from used automotive engine oil. The
equipment is expensive, and the extraction process is
complex, but the approach provides an economical
way to recycle used engine oil. Both companies have
developed unique technical procedures. Both companies also believe that advertising and promotion
A

STRATEGY
B1

STRATEGY A1

STRATEGY A2
STRATEGY A3

STRATEGY
B2

M4-11

STRATEGY
B3

STRATEGY
B4
1

STRATEGY
B5

-1

-6

10

-3

-5

-20

12

STRATEGY A4

-8

STRATEGY A5

-5

STRATEGY A6

-1

-1

-3

-2

STRATEGY A7

-1

-1

STRATEGY A8

-6

STRATEGY A9

-5

-7

STRATEGY A10

-5

STRATEGY A11

-5

STRATEGY A12

-3

-3

STRATEGY A13

-2

STRATEGY A14

STRATEGY A15

-4

-5

Bibliography
Bierman, H., and L. Fernandez. Game Theory with Economic Applications,
2nd ed. New York: Addison-Wesley, 1998.

Fudenberg, D., and D. K. Levine. The Theory of Learning in Games.

Cambridge, MA: MIT Press, 1998.

Bowen, Kenneth Credson, with contributions by Janet I. Harris. Research

Games: An Approach to the Study of Decision Process. New York:
Halstead Press, 1978.

Koselka, Rita. Playing Poker with Craig McCaw, Forbes (July 3, 1995): 6264.

Brandenburger, A., et al. The Right Game: Use Game Theory to Shape
Strategy, Harvard Business Review (JulyAugust 1995): 5771.

Lucas, W. An Overview of the Mathematical Theory of Games,

Management Science 8, 5, Part II (January 1972): 319.

Bushko, David, et al. Consultings Future, Game Theory, and Storytelling,

Journal of Management Consulting (November 1997): 3.

Luce, R. D., and H. Raiffa. Games and Decisions. New York: John Wiley &
Sons, Inc., 1957.

Davis, M. Game Theory: A Nontechnical Introduction. New York: Basic

Books, Inc., 1970.

Shubik, M. The Uses and Methods of Game Tlieory. New York: American
Elsevier Publishing Company, 1957.

Dixit, A. K., and Susan Skeath. Games of Strategy. New York; WW Norton
and Co., 1999.

Sinha, Arunava. The Value Addition Game, Business Today (February 7,

1998): 143.

Dutta, Prajit. Strategies and Games: Theory and Practice. Cambridge,

MA: MIT Press, 1999.

von Neumann, J., and O. Morgenstern. Theory of Games and Economic

Behavior. Princeton, NJ: Princeton University Press, 1944.

Lan, Lim, et al. Property Acquisition and Negotiation Styles, Real Estate
Finance (Spring 1998): 72.

Z00_REND1011_11_SE_MOD4 PP3.QXD

M4-12

2/21/11

12:50 PM

Page M4-12

MODULE 4 GAME THEORY

Appendix M4.1: Game Theory with QM for Windows

In this module we show how to solve 2 * 2 games using a variety of techniques. In Section
M4.5, for example, we discuss how a mixed strategy game could be solved using straightforward algebraic techniques. In this game, player X will receive 4 and 2 by playing strategy X1
when player Y plays strategies Y1 and Y2, respectively. Values of 1 and 10 are the results when
player X1 plays strategy X2.
To illustrate QM for Windows, lets use these data. Program M4.1 shows the mix that each
player should play for each strategy. The value of the game, 3.45, is displayed at the bottom right
of the decision table.
PROGRAM M4.1
QM for Windows Output
for Game Theory
Other information is available
by selecting Window.

The player represented by the

rows will play strategy 2 about
18% of the time.

The value of the game is 3.45.